Forex Newsletter - October 5, 2024

India's Forex Reserves Hit Record High

India's foreign exchange reserves have surged to a record high, marking a significant milestone in the country's economic stability.

Key Highlights

• Record High: India's foreign exchange reserves have crossed the $700 billion mark for the first time, reaching $704.885 billion in the week ended September 27. This makes India the fourth country, after China, Japan, and Switzerland, to achieve this milestone.
• Weekly Increase: The reserves saw a substantial increase of $12.59 billion during the week, which is one of the highest weekly surges on record.
• Components of Reserves: The foreign currency assets (FCA), a major component of the reserves, rose by $10.46 billion to $616.154 billion. Gold reserves also increased by $2.184 billion to $65.796 billion.

Drivers of the Increase

• Foreign Investment: Robust foreign institutional investor (FII) inflows into equity and debt markets, partly driven by the inclusion of Indian government bonds in the JP Morgan Emerging Market Index, have significantly contributed to the rise in reserves.
• Valuation Gains: Appreciation of major currencies like the Euro, Pound, and Yen, along with moderation in US bond yields and higher gold prices, have also boosted the reserves.
• Balance of Payments: A small current account deficit, below 2% of GDP, and strong capital flows have supported the build-up of foreign exchange reserves.

Economic Implications

• Buffer Against Global Risks: High forex reserves act as a buffer against global economic spillovers and external risks, providing stability to the Indian economy.
• Investment Attractiveness: Strong foreign exchange reserves make India an attractive investment destination, as investors are more comfortable with markets that have robust external metrics.
• Impact on Rupee: While high reserves do not necessarily mean a stronger rupee, they help in mitigating the impact of outflows on the currency.

Future Outlook

• Projected Growth: Analysts expect India's foreign reserves to continue growing, potentially reaching $707 billion by March 2025 and $745 billion by March 2026, driven by falling crude oil prices and increased equity and debt-related inflows.

References: India's forex kitty jumps to hit record high of $704.88 billion: Forex kitty hits $700 billion for 1st time, up $13 billion in week: In a first, India's forex kitty swells above $700-billion mark: India's forex reserves top $700 billion - Telegraph India: India's Forex Reserves Hit Record High For Six Straight Fortnight To Top $700 Billion

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